Turn Up the Gas on Mexico’s Energy Revolution

Mexican President Enrique Pena Nieto announced his government’s proposal for far-reaching energy reform two days ago, a plan that includes the shake-up of national oil company Petroleos Mexicanos and the opening of oil exploration and production to private and foreign companies after 75 years of running a state-run monopoly. That has opened an intense debate over who should have the right to exploit the nation’s oil reserves, commonly referred to as the tesoro nacional (national treasure) or oro negro (black gold).

But behind the public’s focus on oil looms another vitally important and less discussed question: what to do about Mexico’s huge natural-gas reserves. These are found in associated gas fields (alongside oil reserves) and nonassociated deposits, and, most important, in Mexico’s significant shale resources. The U.S. Energy Information Administration estimates that Mexico has the world’s sixth-largest shale-gas reserves, with 555 trillion cubic feet of recoverable reserves (plus a further 13 billion barrels of recoverable shale-oil reserves). Yet only minimal investment in shale gas has taken place in Mexico, while Pemex focuses on holding up its rapidly declining oil production from the Gulf of Mexico.

The potential impact of exploiting this gas can be seen in the extraordinary revolution that has taken place in Mexico’s northern neighbor. The U.S. shale revolution has drastically increased gas production and brought about a free fall in prices, to a low of $1.95 per million British thermal units in April 2012 from a high of $13.42 per million BTUs in October 2005. Now, the price sits at about $4. Thanks to a gas glut and low gas prices, the U.S. economy has added hundreds of thousands of new jobs, improved the economic competitiveness of its businesses, and strengthened its current-account balance.

Perversely, this bonanza has produced a gas shortage in Mexico. As prices fell, demand rose -- from the Federal Electricity Commission (CFE) for generating purposes, from Pemex for use as a fuel in its refineries, and from the private sector, which is seeking to take advantage of historically low oil prices. Low gas prices, however, resulted in Pemex reducing its gas production to 6.38 billion cubic feet a day in 2012 from 7.03 billion cubic feet a day in 2009. Over the past 18 months, Mexico’s private sector has been clamoring for access to more natural gas, but Pemex has not responded by increasing production -- it chose instead to import more. Between 2005 and 2013, Pemex more than doubled its natural-gas imports to 1.09 billion cubic feet a day from 480 million cubic feet a day. The CFE has also increased its gas imports for generation.

But it has not been enough. During 2012 and 2013, low natural-gas supplies have forced private industries to shut down their manufacturing processes several times. What’s more, the current cross-border natural-gas pipeline network is at full capacity, and it will take several years before the planned Los Ramones pipeline brings much-needed imports from the U.S. In the meantime, Mexico’s private companies have been forced to turn to alternative fuel sources, most commonly liquefied natural gas, which is imported and sold at prices of $18 to $25 per million BTUs. This too is hurting Mexican economic competitiveness; while companies look to the U.S. when they open new production facilities to take advantage of low fuel prices, Mexico’s high energy costs are an obstacle to new investment.

That’s why Mexico’s government needs to open up its considerable shale reserves to private participation. A rapid development of shale resources in Mexico’s north, where the Eagle Ford geological formation extends across the border from Texas, would provide much-needed supplies and help to satisfy rising demand, as well as directly and indirectly creating tens of thousands of jobs. At the same time, Mexico and the U.S. must work together to build the cross-border pipeline infrastructure that would bring cheap imports of gas. Lastly, Mexico must develop its own national-gas pipeline network to make sure that the gas can get to market in a country where only half of its national territory has access to the fuel source.

Sadly, Pena Nieto’s announcement does little to change the outlook for gas in Mexico. Although the profit-sharing contracts announced by the president may attract private and foreign interest in deepwater oil, they will not be enough to drive investment in shale resources, in which smaller companies tend to dominate the scene. The granting of concessions with the prospect of healthy returns would have been more attractive. The Mexican congress now needs to work on adapting the government’s proposal so that it offers companies more incentives to invest; failing that, Mexico’s shale-gas reserves are unlikely to see any speedy, substantial development.

Mexico’s closed and nationalistic approach to hydrocarbons has been an important element in the nation’s history and development process. But in gas, no less than in oil, the time is right to open up to private and foreign cooperation, to integrate its energy market with the rest of North America, and to usher in a truly 21st-century approach to energy security.

Duncan Wood is director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington.

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